DIGITAL COMMERCE: FINTECH COMES TO AMERICA AT LAST / THE ECONOMIST

Digital commerce

Fintech comes to America at last

The digital payments boom

America is home to both Silicon Valley and Wall Street, yet it has long seemed in the dark ages on digital payments. 

Until 2018 card purchases required hand signatures, 15 years after Europe switched to chip-and-pin. 

A cosy credit-card duopoly, consisting of Visa and Mastercard, works with the banks to issue cards, with the result that there has been too little competition and sky-high profit margins. 

Asia has leapt ahead, with pervasive, fast and dirt-cheap payments services, and a new generation of dynamic fintech firms that have rapidly reached scale. 

Having outdated and expensive digital financial plumbing is no mere technicality: as online shopping becomes a bigger part of everyday spending, it threatens to become a heavy tax on innovation. 

And it means too few people, especially in poorer households, have access to cheap and simple financial tools.

The good news is that the picture in America is changing for the better. 

Thanks to the pandemic, there has been a surge in payments online and experimentation by consumers with new services provided by digital-payments firms. 

In the past quarter the volume of transactions on PayPal was 36% higher than a year earlier. 

The number of people using Square’s digital Cash App rose by 50% to 36m during 2020. 

Investors are now betting that these two firms, together with Stripe and Adyen (which is Dutch), form a quartet that can take on America’s stodgy financial establishment. 

(The chairman of The Economist’s parent group is a director of Square.) 

PayPal is worth $275bn, nearing Bank of America, the country’s second-biggest lender.

Yet there is a catch. Despite the rise of innovative firms, fees for American consumers have yet to fall by much. 

Square charges 2.6% on the average transaction; Stripe’s fee nears 3%. 

By contrast, China’s big fintech firms charge below 0.5%. 

Fees have been kept low by a fierce price war.

A big part of the problem in America is that, rather than route purchases through competing payment pipes, the fintechs still often have little choice but to rely on America’s credit-card networks to connect merchants, banks and consumers. 

The credit-card firms continue to demand a high rent of roughly 2%. 

Funds can take days to travel. 

That reflects the power and entrenched position of Visa and Mastercard. 

They process 86% of card payments through huge networks linking most shops and firms, which have to sign up to detailed terms and conditions.

You might think that the answer is antitrust action against the credit-card firms. America’s competition watchdogs are growling. 

Last November the Department of Justice sued to block Visa’s $5.3bn purchase of Plaid after Visa’s boss described it as an “insurance policy” to neutralise a “threat to our important us debit business”. 

The two firms abandoned the deal. 

On March 19th the Wall Street Journal reported that the justice department had started a new probe over whether Visa is inhibiting merchants from switching to cheaper services. 

But do not get your hopes up. 

The courts, which decide most antitrust cases in America, take ages to act and tend to be too lenient. 

A big antitrust case against American Express in 2017 flopped.

Instead, the key to making payments more competitive in America is to create a new network of financial plumbing: a “real-time” interbank-payment system allowing for near-instant and cheap transfers. 

Swathes of Europe and Asia have already done this. 

Once this exists, banks and fintechs can build products, standards and services on top of it. 

In Singapore and the Netherlands, for example, those efficient payment pipes are open to digital wallets, which can process payments in a few clicks, taps or by scanning a qr code.

America’s own effort at instant payments, backed by the Federal Reserve and known as FedNow, is to launch in 2023. 

The big banks and credit-card firms are keen to delay a system that could disrupt the status quo. 

The government and the Fed should not just ignore their grumbles but bring forward the timetable. 

The pandemic has shown that online transactions have come of age. 

It has also shown that the public sector can act quickly and effectively when it has to. 

Cheap and swift digital payments are a prize that should be viewed as a priority.